NCDEX Advocates for Fair Competition and Innovation in Derivatives Market

The National Commodity & Derivatives Exchange Shares (NCDEX) has recently voiced its perspective on a proposal by the Securities and Exchange Board of India (SEBI) to standardize weekly derivative contract expiries, signaling a commitment to fostering fair competition and innovation within the derivatives market landscape. In a meeting of the SEBI-constituted committee on derivatives market reform, NCDEX, along with the Metropolitan Stock Exchange (MSE), expressed reservations regarding the restriction of weekly derivative contract expiries to just two days.

NCDEX urged SEBI to consider allowing each exchange to maintain its own distinct expiry day. This move, it argued, would not only promote fair competition but also provide critical support for new entrants aiming to establish themselves in the derivatives space. To support its position, NCDEX has been asked to submit a detailed representation to SEBI, outlining how its proposal would contribute to capital formation and benefit investors.

The exchange emphasized that fixed expiry days, particularly if reserved for the dominant players such as NSE and BSE, could introduce structural rigidities and limit opportunities for innovation. Such a framework, NCDEX cautioned, could disproportionately impact newer or smaller exchanges, making it more challenging for them to attract participation and potentially entrenching the dominance of existing incumbents.

NCDEX also highlighted the potential for an uneven playing field if new entrants are compelled to compete under the same expiry day regime as well-established exchanges with deeper liquidity and entrenched market positions. To mitigate this, NCDEX has suggested that SEBI consider granting temporary relaxation to new entrants, allowing them a unique expiry day during their initial phase. This strategic move is designed to boost their competitiveness and enable a more gradual and sustainable market entry.

While SEBI acknowledged the concerns raised by NCDEX, it also pointed out that the previous scenario of five different expiry days across NSE and BSE had led to increased hyperactivity in index options trading. The regulator's primary concern is that expanding the number of expiry days could potentially reverse recent efforts to bring discipline and restraint to the derivatives market, undermining overall market stability.

The committee broadly supported SEBI’s view, emphasizing that product innovation should not solely rely on differing expiry days but should prioritize market stability and investor interest. It advised NCDEX to clearly demonstrate how its proposal aligns with investor interests and contributes to the long-term development of the capital market.

Requests for responses sent to the regulator and the NCDEX, did not elicit a response. However, SEBI is likely to finalize a proposal that would mandate all equity derivative contracts—futures and options—on each exchange to expire only on either Tuesday or Thursday. Each recognised stock exchange will be allowed one weekly index options contract, which must expire on either Tuesday or Thursday, depending on the exchange’s choice. This means an exchange can offer a weekly expiry on either of the two days, but not both.

NCDEX remains committed to engaging with SEBI to find a balanced solution that promotes both market stability and healthy competition. This proactive approach underscores its dedication to creating a vibrant and dynamic derivatives market that benefits all participants, particularly investors. The exchange's emphasis on innovation and fair competition reflects a forward-looking strategy aimed at strengthening its position within the financial ecosystem and fostering long-term growth.